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Shariah Issues in Islamic Banking : Bay Al-Inah, Tawarruq and Wa’d

Abstract The rising of the Islamic banking and finance industry is a direct response to the growing awareness amongst Muslim regarding the need of alternative financial products and services that is complied with the teaching of Islam. To be specifically, the demand is based on the avoidance of the element of Riba which is widely and fundamentally practiced in the conventional banking industry. The attempt by the Islamic banking and finance industry had so far been successful and it could be witnessed by the launching of wide range of Shariah compliant financial products and transaction.

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However, none of us can guarantee that the Shariah compliant products approved are fault-free absolutely. Among the practices of the industry, the practice of Bay al-Inah or the practice of sale and buy-back, Tawarruq which quite commonly used in Malaysia, have been criticized strongly especially the voices from the Middle East. The other issue that will be discussed briefly in this project paper is the applicability of Wa’d , the unilateral promise. Key terms of the research 1 Bay al-Inah 2 Tawarruq 3 Wa’d 4 Al Ijarah al Muntahiya Bittamleek 5 Statutory Declaration

The rising of the Islamic banking and finance industry is a direct response to the growing awareness amongst Muslim regarding the need of alternative financial products and services that is complied with the teaching of Islam. To be specifically, the demand is based on the avoidance of the element of Riba which is widely and fundamentally practiced in the conventional banking industry. The attempt by the Islamic banking and finance industry had so far been successful and it could be witnessed by the launching of wide range of Shariah compliant financial products and transaction.

However, none of us can guarantee that the Shariah compliant products approved are fault-free absolutely. Among the practices of the industry, the practice of Bay al-Inah or the practice of sale and buy-back, Tawarruq which quite commonly used in Malaysia, have been criticized strongly especially the voices from the Middle East. The other issue that will be discussed briefly in this project paper is the applicability of Wa’d , the unilateral promise. SHARIAH ISSUE ONE: Bay al-Inah THE CONCEPT

Linguistically, the term “Inah” carries the meaning of salaf, or contracting a loan. It is used in this meaning to refer to purchasing on credit. It could also be a derivative of the term “ayn”, which also means present assets, that is cash. Thus, it denotes a situation whereby one purchases an asset for its subsequent sale on cash that is needed by him. Bay al-Inah is generally defined as an arrangement whereby a seller sells to the buyer some object for cash deferred payment; then, simultaneously, the seller mmediately buys back the same object for a lesser amount than the deferred price in cash. Thus, the transaction amounts to a loan whereby the difference between the two prices represents the interest . Modus Operandi: The above diagram shows the modus operandi of the Bay al-Inah that has been practiced by the Islamic banks in Malaysia so far. In this transaction, the bank sells its asset to the customer who is in need of liquidity on credit. The price under the sale includes the bank’s profit margin charged on the customer.

Subsequently, the bank buys back the asset from the customer for cash payment. Eventually, the customer gets the cash payment, and pay the bank the deferred price over a tenure by periodic instalments which constitutes the same effect and result of a loan . CURRENT PRACTICE IN THE INDUSTRY In Malaysia, the practice of Inah may take 2 names, depending on the original owner of the asset. If the asset to be used belongs to the customer, the contract is known as Bay Bithaman Ajil (BBA). If the asset belongs to the bank, then the contract will be named as Bay al-Inah. ven though the legal documents may differ from one financing to the another, but the common documentation will consist of Property Purchase Agreement (PPA) and Property Sale Agreement (PSA). Besides, the Master Facility Agreement will also be prepared to encapsulate and detail out all necessary ingredients of the facility granted. These documents reveals that though the two sale contracts are executed separately without making one of them conditional to the other, the master facility Agreement has clearly indicated the intention of the parties in entering into these two consecutive sale contracts.

LEGITIMACY OF BAY AL-INAH The main proponents of Bay al-Inah is the Shafii school. The Shafii jurists have illustrate their permissibility in a situation whereby a person sells a commodity on cash or credit terms and hands over possession, and the parties separate with mutual pleasure about the contract, it is permissible for him to purchase it from the previous buyer for an amount equal to, higher, or lower than the former price, of the same currency as before or different, paying cash or oncredit, after receiving payment for the previous sale or before it.

On this basis, according to the authoritative position upheld by the Shafii scholars, the two independent contracts, jointly referres to as “Inah” are held valid, but reprehensible. This principle even applied when one of the two parties is known for the practice of Inah, as according to the principle upheld by the Shafii school, the intention of the parties, even when it happens to be unacceptable, does not result in the invalidity of the contract, unless such intention is given expression in the contractual text.

As a result, it will be the case whereby even the situation indicates the parties’ intention to carry out a second sale, this will not necessitate the invalidity of the contract. In a simple word, the Shafii school considered the intention of the parties only taken into account when the invalid intention is explicitly written in the contract . In the other side, the Maliki and Hanbali schools opined that the contract of Bay al-Inah is not valid.

The Maliki jurists have categorized the process in question under buyu’ al-ajal, which concerns on the discussion of various form of two sale contract being taking place in sequence involving combination of different prices and periods. They have described 9 possible variations, the permissibility of two of which have been subjects of different opinions, while there is unanimity pertaining to the rest. It was said that when one sells a commodity on a deferred payment and thereafter purchases it again, the price in the second transaction could be deferred for a period equal to the first, shorter than the first, or longer.

In each of these situations, the price of the second transaction could be equal to that of the first, lower than, or higher. The types where jurists have differed are: -where the price of the second transaction is lower than that of the first, and is on a cash basis; and -where the price of the second transaction is higher than that of the first and is deferred for a longer period. Imam Maliki and other jurists regard these formats invalid.

They considered the second transaction along with the first, and regard the grounds viable enough to suspect that the purpose is to exchange an amount of money with a higher amount that is deferred, which substantially constitutes the prohibited Riba. Hence, the transaction acts as a medium for attaining what is prohibited and it is invalid inherently. The Hanbali school agreed that the Bay al-Inah is not valid as the difference of the selling price of a commodity with profit margin and the lesser buying price transaction serve as an avenue leading to Riba.

One could seek to legalise the sale of one thousand against one thousand five hundred by involving an asset in this manner. But, it was also mentioned that if the price of the second transaction is equal to that or higher than the first transaction, then it is permissible since no margin equal to the nature of Riba is involved. The above ruling applies where the commodity had not diminished in any manner after its sale. If it had diminished, it could be purchased at any price, as any decrease in the price could be against the loss of value in the asset, and not for the purpose of Riba.

If the purchase is against another asset, or the first sale was against an asset and the commodity is then repurchased for cash, it is permissible due to the fact that Riba is not applicable between money and commodities. If the first sale is on cash, and the second sale takes place through another currency, it is permissible. Basically, the determination of validity in contract is based on the parties’ motive and validity in sale under consideration, the motive of the parties is illegal will put the sale invalid aas it constitutes a legal device to obtain a loan with interest which should be averted.

Imam Hanifah from the Hanafi school opined that if the two prices are such that Riba could be applicable such as gold and silver, and are identical in type, for example: gold, it is not allowed to repurchase the sold commodity except at a price equal to the first, without any increase or decrease in price. If the price of the first sale was such that Riba is not applicable, such as commodities, he may repurchase the sold commodity for a price higher than the initial price or lower.

If the two prices belong to different types where Riba is applicable such as gold and silver, disparity between them although analogically permissible, but is unlawful based on Istishsan. The majority objection to Bay al-Inah were supported by a number of Hadith attributed to the Prophet and his companions. One of the example was the Hadith that the Prophet warned those who practiced Bay al-Inah with calamity (bala’) or disparagement (dhill). Another example was a report on a Bay al-Inah transaction that had been brought to the knowledge of Aishah r. a. hich read: “Aliyah binti Ayfa said: I entered Aishah’s place with Umm Walad of Zaid bin Arqam and his wife. Then, Umm Walad of Zaid bin Arqam said: I had sold a slave to Zaid bin Arqam for 800 dirhams on deferred payment. Then I bought him back from Zaid for 600 dirhams cash. Aishah replied: Very bad is what you sold and bought. Convey to Zaid that he had nullified his struggle with the Prophet, unless he repented. ” ALTERNATIVE SOLUTION Al Ijarah al Muntahiya Bittamleek Under this structure, the bank appoints customer to be its agent to make purchases from the seller.

The customer then takes the purchased asset on lease from the bank, for rental payments. At the end of the lease period, the asset will be transferred to the customer via a sale (normally the price of the last rental payment) or as a gift. SHARIAH ISSUE TWO: Tawarruq THE CONCEPT Tawarruq has been generally used to refer to an arrangement whereby a person who was in need of cash bought some goods for deferred payment. Then he sold the goods to another party other than the original seller for payment of cash with a lower price . Tawarruq is considered an alteration based on the Bay al-Inah.

The distinction between the Bay al-Inah and Tawarruq is that the person who requires liquidity purchases an asset from a seller on credit, thereafter sells it on cash basis at a price lower than the purchase price to the seller in the case of Bay al-Inah. However, Tawarruq involves a third party whereby the one who requires liquidity purchase an asset from someone on credit, and thereafter sells it, usually for a lower price, to a person other than the original seller. So, the structure does not give a direct indication of Hilah solely to undercover the Riba.

Modus Operandi: CURRENT PRACTICE IN THE INDUSTRY The concept of Tawarruq contract is popular among the contemporary Islamic financial system. In fact, the short term financing which various adaptions of Murabaha was used as the standard mode by the majority of Islamic banks in the industry is in deed structurally designed based on this Tawarruq principle. However, there are some variation on the simple structure of Tawarruq due to the reason the Islamic banks encounter objections from the classical scholars with the similar stand and analogy as the way they enounced the Bay al-Inah. One of the most popular variation is the Tawarruq Masrafiy. In this mode of Tawarruq Masrafiy, the Islamic bank is acting as a mere intermediary and does not possess the asset that could be readily brought into the Tawarruq financing process and therefore is in need of liaising with a trader/ broker, usually an external party, for the purpose of facilitating the Tawarruq contract. Similarly, the disposal of such asset by the customer of the facility needs to be further simplified by the mediation of an agent.

Hence, this Tawarruq Masrafiy could be more complex in its structure . Modus Operandi: LEGITIMACY OF TAWARRUQ Most of the scholars make their conclusion on the validity of Tawarruq based on the same authorities and analogy of the validity of the Bay al-Inah. The scholars who have upheld the permissibility of Tawarruq have fundamentally relied on the general connotation of the verse permitting sale while prohibiting usury. Tawarruq as a type of sale, is included within this context of permissibility due to the absence of any Quranic verse or Hadith that rules it unlawful.

The proponents somemore cited the Hadith reported by the Companion Abu Said al-Khudri which narrates that a man from the region of Khaybar who had been contracted the upkeep of a plantation came to the Prophet with some dates of good quality. When the Prophet asked him whether all dates of Khaybar were of similar quality, the man replied in the negative and added that they used to obtain a measure of better dates against two measures of ordinary dates, and two measures against three measures.

The Prophet forbade him from doing so and directed him to sell the low quality dates against silver coins, and then purchase better dates against silver . This Hadith indicates the permissibility of using the described method for avoiding involvement in Riba overtly or covertly; the medium of a sale is employed, which fulfils all conditions and prerequisites of sales, free of factors that result in its invalidity. The intention of procuring dates of better quality as the end result of the transaction has not been considered to invalidate the material structure.

Hence, this shows that the legality og the sale transaction where different purposes are intended when the medium utilized is acceptable and free of Riba explicitly and implicitly. As a conclusion for the proponents, it is permissible to attain liquidity through a medium of sale such as the case of Tawarruq when there is a need for doing so. On the other hand, the denouncers of the Tawarruq have mainly concentrated on the aspect of intention.

They argues that the intention here is to procure money, which could tentamount to the sale of money against a different amount of money, while the asset serves only as a medium, the acquisition of which is not primarily intended. Therefore the structure strongly connotes the p[ossibility of a legal stratagem adopted for this purpose. thus a major reason for the disapproval of tawarruq is that it appears to be a Hilah adopted for attainment of what could otherwise be Riba. It is money against money, with a piece of silk cloth pushed in between. ” as the stand of Ibn Abbas when he was asked on the question regarding the permissibility issue. One of the frequent cited authorities by these denouncers is the Hadith which reported that The Prophet has said: A time is certainly coming to mankind when people will bite each other and a rich man will hold fast what he has in his possession though he has not commanded for that.

Allah the Almighty said: (and do not forget liberty between yourselves), and then those who are forced to contract sales while the Prophet forbade forced contracts, one which involves some uncertainty and sales of fruits before they are ripe. In a simple word, the end result of the whole transaction is their main concern in determining the legality of a particular structure of transaction. Hence, the Tawarruq is deemed nothing but equally to the practice of Riba as the purpose of Tawarruq is to obtain instant cash for a higher consideration later.

In the OIC Islamic Fiqh Academy in its 15th Meeting, it was decided that the Tawarruq is allowed. However, in its later meeting, ehich is the 17th Meeeting, the OIC Islamic Fiqh Academy clarified its stand on Tawarruq by stating that the Tawarruq Masrafiy that largely adopted by the Islamic financial institutions is disallowed. The reasoning behind the disapproval is that the Tawarruq Masrafiy practiced by the Islamic banks is in the form of organized Tawarruq or pre-planned Tawarruq rather than ad hoc Tawarruq which cuasing it almost synthetic and fictitious as Bay al-Inah in essence.

ALTERNATIVE SOLUTION Since the problem of Tawarruq shares the similar features of the Bay al-Inah, the alternative solution could be the same as discussed in the former part. Hence the Al Ijarah al Muntahiya Bittamleek could be the substitution for both Bay al-Inah and Tawarruq as a solution for avoiding the Riba element concerned. SHARIAH ISSUE THREE: Wa’d THE CONCEPT The 3-letter root WA-A-D (wa’d), corresponding to the verb Wa’ada, indicates a promise but can also be used for a threat.

The technical definition of Wa’d (promise) is based upon the linguistic definition, affirming the positive meaning and excluding the negative meaning (threat). A promise has to be for something Ma’ruf (recognized as good by the Shariah and sound intellect). If a promise is to do something evil or wrong, then it is not obligatory to fulfill it and the time in which a promise is to be fulfilled is the future, not the time at which the promise is made. The problem incurred in application of Wa’d is that some banks claim that their unilateral promise (Wa’d) is not binding.

However if the customer breaks his/ her unilateral promise, then the bank charges the customer for the loss incurred as a result of not fulfilling his unilateral promise . LEGITIMACY OF WA’D The resolution 1409H of the Islamic Fiqh Academy has decided that a unilateral promise (Wa’d) which is issued unilaterally by either orderer or the client, is by religion binding upon the promisor except where otherwise justified. It is also judicially binding if it is made contingent upon a reason and if the unilateral promise (Wa’d) entails a cost for the unilateral promise (Wa’d).

Insuch cases, the consequences of the binding character of the unilateral promise (Wa’d) are determined by either the fulfillment of the unilateral promise (Wa’d) or by reparation for losses actually incurred as a result of the non-fulfillment of the unilateral promise (Wa’d) without justification. According to the resolution of the Islamic Fiqh Academy that prohibits the Wa’d to be binding on both parties but allowed it to be so on one of them, it is rather too arbitrarily and hardly acceptable. It should be the other way round whereby one should treat the Wa’d either binding on both parties or optional for both parties.

Making it binding upon one to the exclusion of the other, is illogical and denotes a misinterpretation of jurisprudential principles. In a summary, it is admissible for Wa’d as an alternative to a invalid contract to be binding because Wa’d is analogous to a contract as well. Any suggestion for making it binding upon both or either parties explicitly or impliedly with any other Hilah is not founded on any legitimate basis. SOLUTION The Wa’d is at its best to be excluded in the practice of the Islamic banking legal documentation system due to the uncertainty and arbitrariness.

However, the characteristic of the Wa’d might be implemented through a contemporary form of statutory declaration in declaring certain sub-condition for the contract between the bank and customer instead of the main terms and conditions of the contract. For example, if the real estate was brought on the purpose for self-staying purpose instead of profit generation, then the statutory declaration may be made in declaring this. This might not be the main issue in the construction of the bank’s facility agreement which must be included within the terms but can be proclaimed in the way of declaration.

For the consideration and/or performance that is much important which will affect both parties essentially, of course must be included in the facility documents entered by the parties and there is no point to make it in a rather uncertainty form of Wa’d. CONCLUSION The Al Ghazali once said that the very objective of the Shariah is to promote the welfare of the people and whatever ensures the safeguarding of people’s faith, life, intellect, posterity and wealth serves the public interest and is desirable.

In the issue of Wa’d, it is certainly not the best form of contracting to the Islamic banking industry that put much demand on certainty, hence it would be rather fully utilize the bilateral contract on main consideration/performance or only using the statutory declaration on the least important issue such as the example given since the ambiguity part of the Wa’d is not serving the public interest for all. From the point of Shariah, the Bay al-Inah and Tawarruq is not really serving the welfare of people and it has similar oppressive character of Riba.

The banks are still getting the pre-determined rate of return and the application of Bay al-Inah or in other name BBA and Tawarruq is mostly cosmetic. If the Islamic banks label their hamburger as a MECCA burger, as long as it still has the same ingredients as a McDonald’s burger, is it really any different in substance? It is also the case between the Bay al-Inah, Tawarruq with inherent Riba element and the conventional interest-based loan.

References: A: Book Dr. Muhammad Saleem (2005), Islamic Banking- Observation and Arguments on Riba (interest or usury), Islamic Banking Practices, Venture Capital and Enlightenment, published by Xlibris Corporation, p26. Professor Rafic Yunus Al-Masri (2002), The Binding Unilateral Promise (Wa’d) in Islamic Banking Operations: Is it Permissible for a Unilateral Promise (Wa’d) to be Binding as an Alternative to a Proscribed Contract? , J.